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Book part
Publication date: 11 August 2014

Ben Amoako-Adu, Vishaal Baulkaran and Brian F. Smith

The chapter investigates three channels through which private benefits are hypothesized to be extracted in dual class companies: excess executive compensation, excess

Abstract

Purpose

The chapter investigates three channels through which private benefits are hypothesized to be extracted in dual class companies: excess executive compensation, excess capital expenditures and excess cash holdings.

Design/methodology/approach

With a propensity score matched sample of S&P 1500 dual class and single class companies with concentrated control, the chapter analyzes the relationship between the valuation discount of dual class companies and measures of excess executive compensation, excess capital expenditure and excess cash holdings.

Findings

Executives in dual class firms earn greater compensation relative to their counterparts in single class firms. This excess compensation is more pronounced when the executive is a family member. The value of dual class shares is discounted most when cash holdings and executive compensation of dual class are excessive. Excess compensation is highest for executives who are family members of dual class companies. The dual class discount is not related to excess capital expenditures.

Originality/value

The research shows that the discount in the value of dual class shares in relation to the value of closely controlled single class company shares is directly related to the channels through which controlling shareholder-managers can extract private benefits.

Details

Advances in Financial Economics
Type: Book
ISBN: 978-1-78350-120-5

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Article
Publication date: 15 November 2018

Qing Peng, Xuesong Tang and Yuxin Zheng

Extensively public concern on “Huge Executive Compensation” makes it urgent to investigate the reasonability of high executive compensation. The purpose of this paper is…

Abstract

Purpose

Extensively public concern on “Huge Executive Compensation” makes it urgent to investigate the reasonability of high executive compensation. The purpose of this paper is to explore the effectiveness of compensation contracting based on the specific responsibility of executives. More specifically, this paper is to examine whether high compensation is helpful to mitigate agency problems.

Design/methodology/approach

Considering that board secretaries of listed companies are responsible for information disclosure in China, this paper examines the effect of board secretaries’ excess compensation on firms’ disclosure quality using listed company data from 2007 to 2015. The first measure of disclosure quality is based on the disclosure violation behavior of firms, and the second is KV value that represents the extent to which the investors relay on the stock trading volume. To provide additional confidence that the findings are robust, this paper further conducts two indirect tests based on rumors and cost of equity capital.

Findings

The results show that board secretaries’ excess compensation is negatively associated with the probability of information disclosure violation and also negatively associated with firms’ KV value, suggesting firms that pay high compensation to their information providers are more likely to provide high-quality disclosures. Besides, this paper further finds that board secretaries’ excess compensation is negatively related to the incidence of rumors, the number of rumors incurred or the cost of equity capital.

Research limitations/implications

Overall, the findings provide support to the efficient contracting of executive compensation, which implies that highly paid board secretaries would be better information providers than those poorly paid.

Practical implications

This paper provides empirical evidence that firms’ disclosure quality can be improved by modifying the compensation contract of information providers. This may indicate a new way to improve the quality of disclosures, so as to mitigate the agency problem.

Social implications

In spite of the public criticism on executive excess compensation, the high compensation is not always a signal of manipulation, collusion and self-interest. It also can be a signal of individual talents and great efforts. Board secretaries are worth to be highly paid if they can improve firms’ disclosures, thereby reducing the incidence of rumors and reducing the cost of equity capital.

Originality/value

This paper is the first research to examine the effectiveness of compensation contracting based on information providers’ disclosure responsibility in the Chinese context. It documents a positive relation between board secretaries’ excess compensation and corporate disclosure quality.

Details

Nankai Business Review International, vol. 10 no. 2
Type: Research Article
ISSN: 2040-8749

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Article
Publication date: 24 June 2019

Bill Francis, Iftekhar Hasan and Yun Zhu

The purpose of this paper is to examine whether or not the chief executive officers’ (CEO) compensation is affected by the compensation of the outside directors sitting on…

Abstract

Purpose

The purpose of this paper is to examine whether or not the chief executive officers’ (CEO) compensation is affected by the compensation of the outside directors sitting on their board, who are also CEOs of other firms.

Design/methodology/approach

The authors collect CEOs’ and CEO-directors’ compensation data from Execucomp. The authors then match the CEO-directors’ compensation with appointing firms’ CEO compensation and financial statements, from Execucomp and Compustat, respectively. The sample contains 7,561 firm-year observations from 1996 to 2010, with 1,213 distinct S&P 1500 firms and 1,563 distinct CEO-directors. The authors use ordinary least squared method with firm and year fixed effect in most of the analysis.

Findings

With both annual and excess compensation, the authors find strong evidence that CEO-directors’ compensation is related to the compensation of the CEO. Causally, when CEO-director overturns his/her excess compensation from negative to positive, the CEO is more likely to have similar upward change in the following year, while more interestingly, the opposite does not hold. These findings are persistent over time and remain robust to various additional tests.

Research limitations/implications

Due to the data availability, this paper investigates the S&P 1500 public firms.

Originality/value

It is the first work that investigates the link between board members’ external compensation and the CEO’s compensation. This sheds new light on the process of the CEO’s compensation design, in regard to both the information being utilized in the design procedure and the CEO’s influence on his/her own compensation. Second, this paper adds additional evidence to the choice of peer groups in compensation construction. Third, the authors enhance the understanding of the role of CEO-directors. The authors show that CEO-directors may be the ally of CEO, and help in justifying CEO’s compensation, especially when underpaid.

Details

Managerial Finance, vol. 45 no. 7
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 19 April 2011

Ronen Barak, Shmuel Cohen and Beni Lauterbach

We collect data on CEO pay in 122 closely held firms traded on the Tel-Aviv Stock Exchange during 1995–2001. After estimating CEO pay performance sensitivity and CEO …

Abstract

We collect data on CEO pay in 122 closely held firms traded on the Tel-Aviv Stock Exchange during 1995–2001. After estimating CEO pay performance sensitivity and CEO “excess pay,” we examine how these two pay attributes affect end of period (year 2001) Tobin's Q. Our main findings and conclusions are that (1) when CEO is from the controlling family, the end of period Q is negatively correlated with “excess” pay – “excess” pay to family-CEOs appears like a form of private benefits; (2) when a professional nonowner CEO runs the firm, end of period Q is positively correlated with CEO pay performance sensitivity – incentives to professional CEOs help promote firm value.

Details

International Corporate Governance
Type: Book
ISBN: 978-0-85724-916-6

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Article
Publication date: 17 May 2011

Haidan Li and Yiming Qian

The purpose of this paper is to examine whether outside CEO directors sympathize with the company CEO due to their similar positions and prestige, and make decisions in…

Abstract

Purpose

The purpose of this paper is to examine whether outside CEO directors sympathize with the company CEO due to their similar positions and prestige, and make decisions in favor of the company CEO. Specifically, the authors investigate how outside CEO directors serving on the compensation committee influence CEO compensation.

Design/methodology/approach

The authors investigate how outside CEO directors on the compensation committee impact the level and pay‐for‐performance sensitivity of CEO compensation. In addition, the relation between excess CEO compensation (attributable to outside CEO directors) and future firm‐operating performance is examined.

Findings

It is found that outside CEO directors on the compensation committee are associated with higher CEO compensation. However, excess CEO compensation attributable to outside CEO directors leads to poor future firm‐operating performance. Outside CEO directors are associated with higher CEO pay‐for‐performance sensitivity when the company experiences positive stock returns, but do not impact pay‐for‐performance sensitivity when firm performance is poor. Finally, when the company CEO has more influence on the board, outside CEO directors are more likely to serve on the compensation committee.

Originality/value

The paper is among the first to show that having outside CEO directors on the compensation committee might create agency problems and is costly to shareholders. The findings of the authors' study are relevant to current efforts of regulators and private sectors to enhance oversight of executive compensation.

Details

Review of Accounting and Finance, vol. 10 no. 2
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 15 February 2013

Eric Fricke

The purpose of this paper is to examine how board compensation and holdings are related to mutual fund expense ratios. Previous studies find that compensation and expense…

Abstract

Purpose

The purpose of this paper is to examine how board compensation and holdings are related to mutual fund expense ratios. Previous studies find that compensation and expense ratios are positively correlated and argue that this relationship is potential evidence of rent sharing, whereby excessively compensated boards fail to negotiate with fund managers for lower shareholder fees.

Design/methodology/approach

Using a dataset of US open‐end mutual funds, the author examines how geographic‐based salary data, director profession, director fund holdings and fund returns might explain the relationship between compensation and fees.

Findings

The results provide additional support for potential rent sharing between fund managers and directors and are robust to alternative measures of director compensation, fund sales loads, director holdings and fund returns.

Research limitations/implications

The findings are limited by the sample size and the lack of time series data of the hand‐collected dataset. Data are collected from 598 funds in the year 2003.

Practical implications

These findings suggest that mutual fund expense ratios may be affected by potential agency costs.

Social implications

Mutual fund regulatory focus has been predominantly focused on the independence of board chairmen, but this study shows that compensation may also be a significant contributor to fund governance.

Originality/value

This study is unique in its recent focus on fund expense ratios and board compensation and examining potential explanations for this relationship.

Details

Managerial Finance, vol. 39 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 8 September 2020

Tom Aabo, Nicholai Theodor Hvistendahl and Jacob Kring

The purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.

Abstract

Purpose

The purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.

Design/methodology/approach

This empirical study performs random and fixed effect (FE) regression analysis. It uses option-implied measures of CEO overconfidence.

Findings

The authors contribute to the existing literature by showing (1) that the positive association between high CEO incentive compensation and corporate risk only exists in the sphere of overconfident CEOs and (2) that the positive association between overconfident CEOs and corporate risk only exists in the sphere of high CEO incentive compensation. The authors show that the combination of high CEO incentive compensation and CEO overconfidence is associated with an increase in corporate risk of approximately 6% while the individual effects are for all practical reasons negligible. The results imply that only the combination of high CEO incentive compensation and CEO overconfidence is associated with a significantly elevated level of corporate risk.

Research limitations/implications

The findings are based on S&P 1500 non-financial firms in the period 2007–2016.

Practical implications

The findings have important implications in terms of CEO selection and compensation.

Originality/value

This study provides empirical evidence on the importance of the dual presence of high CEO incentive compensation and CEO overconfidence for corporate risk. The previous literature has primarily investigated these phenomena in isolation.

Details

Managerial Finance, vol. 47 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 14 March 2016

Shin-Rong Shiah-Hou

What is the role of analysts in reducing agency problems and information asymmetry between stockholders and managers? The purpose of this paper is to confirm the analyst’s…

Abstract

Purpose

What is the role of analysts in reducing agency problems and information asymmetry between stockholders and managers? The purpose of this paper is to confirm the analyst’s role by examining his or her influence on CEO compensation structure.

Design/methodology/approach

The major population for this study consists of publicly traded corporations of the S & P 1500 for which data on CEO compensation is available from Standard & Poor’s Execucomp database, along with the proxy statements of these firms. Regression analysis is used to test hypotheses about the effect of analyst coverage on CEO compensation.

Findings

The evidence shows that CEOs of firms with greater analyst coverage or higher analyst coverage quality (analyst coverage index) have higher pay-for-performance (Delta), more compensation incentives to increase firm risk (Vega), more total compensation, and more excess compensation. Even after controlling for the effect of other types of corporate governance, including internal governance and institutional holdings, analysts’ activities still have an incremental effect on CEO compensation structure.

Practical implications

The authors findings may be useful to investors who use analyst coverage to evaluate the firm’s CEO compensation, as it suggests that investors may reference the information about analyst coverage of firms to craft appropriate CEO compensation structures.

Originality/value

The authors results contribute by showing that the extra effect of analyst activities on CEO compensation structure exists, even after controlling for other types of governance mechanisms, such as internal governance and institutional investors’ holdings.

Details

Managerial Finance, vol. 42 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 13 February 2017

Brandy Hadley

The purpose of this paper is to examine the determinants of the increase in firms’ reporting of alternative pay measures in Pay for Performance disclosures and their role…

Abstract

Purpose

The purpose of this paper is to examine the determinants of the increase in firms’ reporting of alternative pay measures in Pay for Performance disclosures and their role in subsequent Say on Pay approval.

Design/methodology/approach

This study explores the most common types of supplemental compensation disclosures used in Pay for Performance discussions using a hand-collected sample of S&P 500 proxy statements from 2012-2014. The sample compares key characteristics of firms reporting “pocketed” pay, “market-value” pay, and “peer comparison” percentile ranking pay compared to firms that do not use these alternatives.

Findings

Results suggest that firms use alternative pay measures in their Pay for Performance disclosures for different reasons. While “pocketed” pay reporters show characteristics of opportunistic disclosures and “peer comparison” reporters tend toward informative disclosure, there is often a significant positive impact of disclosing additional compensation information on Say on Pay approval when combating prior poor Say on Pay support. However, the effect seems most significant for peer comparisons, indicating the value of reporting comparative pay.

Originality/value

This study provides insights into the increasing use of alternative pay measures, and through these measures, identifies an additional mechanism of firms’ responses to Say on Pay votes. In addition, this study highlights the importance of standardized Pay for Performance disclosures to improve informativeness and comparability in financial reporting across firms. Finally, the study provides additional evidence of opportunistic disclosure by firms in order to preserve executive pay.

Details

Managerial Finance, vol. 43 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 24 August 2012

Shin‐Rong Shiah‐Hou and Chin‐Wei Cheng

The purpose of this paper is to explore how outside directors' experience and their compensation affect firm performance through the quality of their monitoring and…

Abstract

Purpose

The purpose of this paper is to explore how outside directors' experience and their compensation affect firm performance through the quality of their monitoring and advising, when traditional board structure devices do not seem to work well.

Design/methodology/approach

First, the authors use a two‐way fixed effects (FE) regression model to explore the effects of outside director experience and compensation on firm performance. Second, in order to address the potential endogeneity problem of outside director compensation, the authors adopt two‐stage least squares regression (2SLS).

Findings

Controlling for other potentially influential variables, it is found that outside director experience and outside director compensation have an economically positive impact on a firm's accounting and market performance. Even when taking into account the endogeneity problem of outside director compensation, outside director compensation and experience still have positive effects on firm performance, consistent with the authors' predictions.

Practical implications

It is inferred that regulators are able to ask publicly owned firms to provide outside director's experience and compensation in detail. In addition, future research should investigate the social relationships between outside directors, which also affect the functions of monitoring and advising.

Originality/value

First, this paper contributes to this area of the extant literature by simultaneously considering the direct impacts arising from the outside director's experience and compensation. Second, the paper highlights the importance of considering multiple dimensions of director's experience in assessing its effects on firm performance.

Details

Managerial Finance, vol. 38 no. 10
Type: Research Article
ISSN: 0307-4358

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1 – 10 of over 4000